ninth consecutive year. Moreover, the CBO stated that "[t]he most significant source of the growth of income taxes relative to GDP was the increase in the effective tax rate."4

The Federal income tax is intended to collect revenues to fund the programs of the Federal government. If more tax revenues are collected than are needed to fund the government, the Congress believed that at least a portion of the excess should be returned to the taxpayers who are paying Federal income taxes. A portion of the surplus could be returned while still retaining enough to pay down the public debt, fund priorities such as education and defense, and secure the future of Social Security and Medicare. Thus, the Congress believed that it was appropriate to provide relief from the high individual income tax rates of prior law. The Congress believed that this provision provides the appropriate level of tax relief without threatening funding for other national priorities. Finally, the Congress believed that the lower rates provided by this provision were a fair means to provide tax relief for all taxpayers.

The Congress believed that high marginal individual income tax rates reduce incentives for taxpayers to work, to save, and to invest and, thereby, have a negative effect on the long-term health of the economy. The higher that marginal tax rates are, the greater is the disincentive for individuals to increase their work effort. In addition, the Congress received testimony from tax experts that high marginal tax rates lead to reduced confidence in the Federal tax system and lower rates of voluntary compliance by taxpayers. Lower marginal tax rates provide greater incentives to taxpayers to be entrepreneurial risk takers; the Congress believed that the high marginal tax rates of prior law discourage success. EGTRRA provides tax relief to more than 100 million income tax returns of individuals, including at least 16 million returns of individuals who are owners of businesses (sole proprietorships, and S corporations). The Congress believed that this tax cut would lead to increased investment by these businesses, promoting long-term growth and stability in the economy and rewarding the businessmen and women who provide a foundation for our country's success.

In addition, lower marginal tax rates help remove the barriers that lower-income families face as they try to enter the middle class. The lower the marginal tax rates for those taxpayers in the lowest income tax brackets, the greater is the incentive to work. The new 10-percent rate bracket in EGTRRA delivers more benefit as a percentage of income to low-income taxpayers than high-income taxpayers and provides an incentive for these taxpayers to increase their work effort.

EGTRRA provides immediate tax relief to American taxpayers in the form of a new rate bracket for the first $6,000 of taxable income for single individuals and the first $12,000 of taxable income for married couples filing a joint return. This new 10-percent rate bracket is effective this year. The Congress believed that such immediate tax relief may encourage short-term growth in the economy by providing individuals with additional cash to spend. Also, the new 10-percent rate bracket in the Act delivers more benefit as

4 Congressional Budget Office, Congress of the United States, The Budget and Economic Outlook: Fiscal Years 2002-2011, January 2001, at 56.

a percentage of income to low-income taxpayers than high-income taxpayers.

The Congress also believed that it is appropriate to repeal the 10-percent surtax imposed in 1993 to cut the deficit. This 10-percent surtax on top of the 36-percent rate resulted in a 39.6-percent marginal tax rate for those in the highest income tax bracket. Because the Congressional Budget Office was projecting budget surpluses over the next ten years, the Congress believed that it is appropriate to repeal this deficit-era surtax.

Finally, there were signs that the economy was slowing. The Congress believed that immediate tax relief could encourage shortterm growth in the economy by providing individuals with additional cash to spend. However, the Congress recognized that it was important to act quickly so that taxpayers are aware of the commitment of the President and the Congress to enact this tax cut and to adjust income tax withholding tables. It was important that taxpayers immediately see the benefits of this tax relief in the form of more money in their pockets.

In general

Explanation of Provision

EGTRRA creates a new 10-percent regular income tax bracket for a portion of taxable income that is currently taxed at 15 percent, effective for taxable years beginning after December 31, 2000. EGTRRA also reduces the other regular income tax rates, effective July 1, 2001. By 2006, the present-law regular income tax rates (28 percent, 31 percent, 36 percent and 39.6 percent) will be lowered to 25 percent, 28 percent, 33 percent, and 35 percent, respectively. New low-rate bracket

EGTRRA establishes a new 10-percent income tax rate bracket for a portion of taxable income that is currently taxed at 15 percent. The 10-percent rate bracket applies to the first $6,000 of taxable income for single individuals, $10,000 of taxable income for heads of households, and $12,000 for married couples filing joint returns. This $6,000 increases to $7,000 and this $12,000 increases to $14,000 for 2008 and thereafter.

The taxable income levels for the new low-rate bracket will be adjusted annually for inflation for taxable years beginning after December 31, 2008. The new low-rate bracket for joint returns and head of household returns will be rounded down to the nearest $50. The bracket for single individuals and married individuals filing separately will be one-half for joint returns (after adjustment of that bracket for inflation).

Rate reduction credit for 2001

EGTRRA includes a rate reduction credit for 2001 to more immediately achieve one of the purposes behind the new bottom rate bracket for 2001. The Congress chose to utilize this credit mechanism (and the issuance of checks described below) because it delivers economic stimulus to the economy more rapidly than would implementation of a new 10-percent rate bracket, even if that were accompanied by an immediate implementation of new wage with

holding tables. Accordingly, this rate reduction credit operates in lieu of the new 10-percent income tax rate bracket for 2001.

This credit is computed in the following manner. Taxpayers are entitled to a credit in tax year 2001 of 5 percent (the difference between the 15-percent rate and the 10-percent rate) of the amount of income that would have been eligible for the new 10-percent rate. Taxpayers may not receive a credit in excess of their income tax liability (determined after nonrefundable credits).

Most taxpayers will receive this credit in the form of a check issued by the Department of the Treasury. The amount of the check is computed in the same manner as the credit, except that it will be done on the basis of tax returns filed for 2000 (instead of 2001). The Congress anticipated that the Department of the Treasury would make every effort to issue all checks before October 1, 2001, to taxpayers who timely filed their 2000 tax returns. Taxpayers who filed late or pursuant to extensions would receive their checks later in that fall.

Taxpayers would reconcile the amount of the credit with the check they receive in the following manner. They would complete a worksheet calculating the amount of the credit based on their 2001 tax return. They would then_subtract from the credit the amount of the check they received. For many taxpayers, these two amounts would be the same. If, however, the result is a positive number (because, for example, the taxpayer paid no tax in 2000 but is paying tax in 2001), the taxpayer may claim that amount as a credit against 2001 tax liability. If, however, the result is negative (because, for example, the taxpayer paid tax in 2000 but owes no tax for 2001), the taxpayer is not required to repay that amount to the Treasury. Otherwise, the checks have no effect on tax returns filed in 2001; the amount is not includible in gross income and it does not otherwise reduce the amount of withholding. In no event may the Department of the Treasury issue checks after December 31, 2001.5 This is designed to prevent errors by taxpayers who might claim the full amount of the credit on their 2001 tax returns and file those returns early in 2002, at the same time the Treasury check might be mailed to them. Payment of the credit (or the check) is treated, for all purposes of the Code, as a payment of tax. As such, the credit or the check is subject to the refund offset provisions, such as those applicable to past-due child support under section 6402 of the Code.

In general, taxpayers eligible for the credit (and the check) are individuals other than estates or trusts, nonresident aliens, or dependents. The determination of this status for the relevant year is made on the basis of the information filed on the tax return.

The Congress understood that, in light of the large number of checks that would be issued, the issuance of checks would take several months. Accordingly, no interest will be paid with respect to these checks. Checks were to be issued in the order of the last two

5 For administrative reasons, it was understood that the Department of the Treasury may need to establish an earlier termination date in order to fully implement the intent of this provision.

6A special rule provides that no interest will be paid with respect to the checks.

7The Congress investigated the possibility of utilizing electronic means, instead of paper checks, to deliver these amounts even more rapidly, but doing so was not possible because of limitations on available data on individual's banking accounts.

digits of the taxpayer identification number (which is generally a taxpayer's social security number), from lowest to highest. Payment by check is the only mechanism for receiving the payment prior to filing the 2001 tax return; taxpayers may not file either amended returns or claims for tentative refunds for tax year 2000 to claim these amounts.

It was anticipated that the IRS would send notices to most taxpayers approximately one month after enactment. The notices were to inform taxpayers of the computation of their checks and the approximate date by which they can expect to receive their check. This information was intended to decrease the number of telephone calls made by taxpayers to the IRS inquiring when their check will be issued.

Modification of 15-percent bracket

The 15-percent regular income tax bracket is modified to begin at the end of the new low-rate regular income tax bracket. The 15percent regular income tax bracket ends at the same level as under present law. EGTRRA also makes other changes to the 15-percent rate bracket.8

Reduction of other rates and consolidation of rate brackets The prior law regular income tax rates of 28 percent, 31 percent, 36 percent, and 39.6 percent are to be phased down over six years to 25 percent, 28 percent, 33 percent, and 35 percent, effective after June 30, 2001. Accordingly, for taxable years beginning during 2001, the rate reduction will come in the form of a blended tax rate. The taxable income levels for the new rates in all taxable years are the same as the taxable income levels that apply under the prior-law rates.

Table 2, below, shows the schedule of regular income tax rate reductions.

Projected regular income tax rate schedules under EGTRRA Table 3, below, shows the projected individual regular income tax rate schedules when the rate reductions are fully phased in (i.e., for 2006). As under present law, the rate brackets for married taxpayers filing separate returns under the bill are one half the rate brackets for married individuals filing joint returns. In addition, appropriate adjustments are made to the separate, compressed rate schedule for estates and trusts.

8 See discussion of the provisions regarding marriage penalty relief in the 15-percent bracket, Part Two, Section III. A., of this document.

Table 3.-Individual Regular Income Tax Rates for 2006

(Projected)

If taxable income is:

But not over:

Then regular income tax equals:

$156,300 .......

Over $339,850 .......

$0 .......

$10,000

$41,450

$41,450 ........

$107,000...

Single individuals

$6,000...... 10 percent of taxable income.
$600, plus 15% of the amount

$30,950

$0 ....... $6,000

$30,950 .......

$74,950 .....

$339,850... $38,120.50, plus 33% of the

amount over $156,300.

$98,692, plus 35%
35% of the
amount over $339,850.

Heads of households

$10,000..... 10 percent of taxable income.

$1,000, plus 15% of the amount over $10,000.

$5,717.50, plus 25% of the

amount over $41,450.

Revised wage withholding for 2001

Under present and prior law, the Secretary of the Treasury is authorized to prescribe appropriate income tax withholding tables or computational procedures for the withholding of income taxes from wages paid by employers. The Secretary was expected to make appropriate revisions to the wage withholding tables to reflect the

The end point of the 15-percent rate bracket for married individuals filing joint returns also reflects the phase-in of the increase in the size of the 15-percent bracket. See Part Two, Section III. B. of this document.